10QSB 1 v061080_10qsb.htm 10QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549


FORM 10-QSB


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED:

For the Quarterly Period Ended September 30, 2006

_________________________________
 
Commission File No. 33-49797
_________________________________
 

ETOTALSOURCE, INC.
(Name of Small Business Issuer in Its Charter)
 
Colorado
84-1066959
(State or Other Jurisdiction of Incorporation
or Organization)
(I.R.S. Employer Identification No.)
   
1510 Poole Boulevard, Yuba City, CA
95993
(Address of Principal Executive Offices)
(Zip Code)
   
(530) 751-9615
(Issuer’s Telephone Number, Including Area Code)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

As of September 30, 2006, the issuer had 73,918,019 shares of common stock, no par value, issued and outstanding.

Transitional Small Business Disclosure Format. Yes o    No x
 
ETOTALSOURCE, INC.

FORM 10-QSB

 

 
 
FINANCIAL INFORMATION
 
 
ETOTALSOURCE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2006
 
INDEX TO FINANCIAL STATEMENTS
 
 
eTotalSource, Inc.
 
ASSETS
  
(Unaudited)
September 30, 2006
  
December 31, 2005
  
Current Assets
  
 
      
Cash
  
$
937
  
$
118,958
  
Other
    
5,475
    
1,223
 
Total Current Assets
    
6,412
   
120,181
 
               
Property and Equipment
              
Furniture and equipment
    
83,922
    
86,451
  
Less accumulated depreciation
    
(74,197
)
  
(67,641
)
     
9,724
   
18,810
 
               
Other Assets
              
Deposits
    
801
   
721
 
     
801
   
721
 
Total Assets
  
$
16,937
  
$
139,712
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
               
Current Liabilities
              
               
Convertible notes payable
  
$
250,000
  
$
250,000
  
Other notes payable
    
797,114
    
772,114
 
Judgments payable
    
204,788
    
204,788
 
Accounts payable and other accrued liabilities
   
348,263
   
291,785
 
Accrued compensation payable
    
1,137,091
   
1,036,104
 
Accrued interest payable
    
434,581
   
265,952
 
Deferred revenue
    
-
   
22,500
 
Total Current Liabilities
    
3,171,837
    
2,843,242
 
               
Convertible Notes Payable, less current maturities and $195,709 and $303,452 discount, respectively
    
739,291
   
696,548
 
               
Total Liabilities
    
3,911,128
   
3,539,790
 
               
Commitments and Contingencies
              
               
Stockholders' Equity (Deficit)
              
Common stock; no par value; 300 million shares authorized,
              
73,918,019 shares issued and outstanding
    
6,369,922
   
6,226,906
 
Accumulated (deficit)
    
(10,264,112
)
  
(9,626,984
)
Total Stockholders' Equity
    
(3,894,190
)
  
(3,400,078
)
Total Liabilities and Stockholders' Equity (Deficit)
  
$
16,937
  
$
139,712
  
             
             
See accompanying notes.
 
   
(Unaudited)
Three months Ended September 30,
  
(Unaudited)
Nine months Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Revenues
  
$
333
  
$
12,852
  
$
25,980
  
$
41,836
  
                           
General and Administrative Expenses
    
108,386
    
207,584
    
438,782
    
727,254
  
                           
Operating Income (Loss)
    
(108,053
)
  
(194,732
)
  
(412,802
)
  
(685,418
)
                           
Other Income (Expense)
                          
Gain (loss) on sale or retirement of assets
    
-
    
(178
)
  
594
    
(245
)
Interest expense
    
(89,340
)
  
(75,585
)
  
(311,140
)
  
(188,125
)
Bad debt write-off
    
-
    
-
    
85,121
    
-
  
Other income (expense), net
    
1,099
    
-
    
1,099
    
1,342
  
Total Other Income (Expense)
    
(88,240
)
  
(75,763
)
  
(224,326
)
  
(187,028
)
                         
Net (Loss)
  
$
(196,293
)
$
(270,495
)
$
(637,128
)
$
(872,446
)
                           
Basic and Diluted (Loss) per Share
  
$
(0.003
)
$
(0.01
)
$
(0.01
)
$
(0.01
)
                           
Weighted Average Common Shares Outstanding
    
54,303,104
    
46,710,821
    
57,440,090
   
46,710,821
 
                           
                           
See accompanying notes.

 
 
   
(Unaudited)
Nine Months Ended September 30,
  
   
2006
  
2005
  
Cash Flows From (Used in) Operating Activities:
          
Net (loss)
  
$
(637,128
)
$
(872,446
)
               
Depreciation and amortization
    
115,934
   
82,071
 
Gain (loss) on sale or retirement of assets
    
43
    
245
  
Stock options and warrant expense
    
76,015
    
72,068
 
Changes in assets and liabilities:
              
Decrease (increase) in other current assets
    
(4,252
)
  
54
 
Decrease (increase) in deposits
    
(80
)
  
441
 
Increase (decrease) in payables, credit cards and accrued liabilities
    
328,946
   
501,129
 
Increase (decrease) in deferred revenue
    
-
    
(22,500
)
               
Net Cash (Used in) Operating Activities
    
(145,021
)
  
(250,188
)
               
Cash Flows From (Used in) Investing Activities:
              
Purchase of equipment
    
-
   
-
 
               
Net Cash (Used in) Investing Activities
    
-
   
-
 
               
Cash Flows From (Used in) Financing Activities:
              
Proceeds from the conversion of warrants
    
2,000
   
-
 
Proceeds from the issuance of convertible debenture
    
-
    
100,000
  
Proceeds from the issuance of note payables
    
25,000
   
125,000
  
               
Net Cash From Financing Activities
    
27,000
   
225,000
  
               
Increase (decrease) in Cash and Cash Equivalents
    
(118,021
)
  
(25,188
)
               
Cash and Cash Equivalents - Beginning of Period
    
118,958
   
37,849
 
               
Cash and Cash Equivalents - End of Period
  
$
937
  
$
2,661
  
               
Supplemental Disclosures:
              
Interest paid
  
$
23,417
  
$
68,229
  
Income taxes paid
    
800
   
1,600
 
Non-cash investing and financing transactions:
              
Conversion of debt to equity
    
65,000
   
-
 
               
               
See accompanying notes.
 
ETOTALSOURCE, INC.

AS OF SEPTEMBER 30, 2006
 
Note A - Basis of Presentation

The accompanying unaudited financial statements of eTotalSource, Inc. (the “Company”) were prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial condition for the periods presented have been included. Such adjustments are of a normal recurring nature. The results of operations for the three-month period ended September 30, 2006 are not necessarily indicative of the results of operations that can be expected for the fiscal year ending December 31, 2006. For further information, refer to the Company's audited financial statements and footnotes thereto included in Item 7 of Form 10-KSB filed by the Company on March 28, 2006.

Certain reclassifications have been made to prior year expenses to conform to the current year presentation and have no effect on the reported net loss for either period.

Note B - Going Concern
 
As reported in the December 31, 2005 financial statements, the Company has incurred significant recurring losses from operations and has a substantial liquidity shortage, including default conditions on certain notes payable and judgments payable to creditors. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. Operating losses and liquidity have worsened through the third quarter of 2006. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note C - Management Changes
 
On April 3, 2006, Virgil Baker, the Chief Financial Officer, submitted his resignation as Chief Financial Officer and Director, such resignation to be effective on May 15, 2006.

On May 1, 2006, John (Cody) Morrow submitted his resignation as Director, such resignation to be effective on May 1, 2006.

Note D - Note Payables
 

On April 15, 2006, a note payable was issued to an unrelated trust, Pao Lan Jarjabka Trust, in the amount of $25,000 bearing interest at 12% interest per annum, and a maturity date of October 15, 2006. The note was issued to complete the post-production of the DVD entitled “Beginning Golf for Women” and for marketing of the DVDs entitled “Family Disaster Preparedness” and “Beginning Golf for Women.” This note is in default.

Note E - Stock Conversions
 
On April 4, 2006, Cornell Capital Partners, L.P. (“Cornell”) converted $6,500 of convertible debentures into 1,969,697 shares of common stock.

On April 19, 2006, Cornell converted $6,500 of convertible debentures into 1,911,765 shares of common stock.

On April 27, 2006, Cornell exercised its warrant to purchase 2,000,000 shares of common stock for a payment to the Company of $2,000.

On May 10, 2006, Cornell converted $9,000 of convertible debentures into 2,500,000 shares of common stock.

On May 24, 2006, Cornell converted $6,000 of convertible debentures into 2,500,000 shares of common stock.

On June 12, 2006, Cornell converted $5,500 of convertible debentures into 2,291,667 shares of common stock.

On June 28, 2006, Cornell converted $4,600 of convertible debentures into 2,300,000 shares of common stock.

On July 12, 2006, Cornell converted $3,500 of convertible debentures into 2,058,824 shares of common stock.

On August 4, 2006, Cornell converted $4,300 of convertible debentures into 2,529,412 shares of common stock.

On August 23, 2006, Cornell converted $4,100 of convertible debentures into 2,562,500 shares of common stock.

On September 24, 2006, Cornell converted $5,000 of convertible debentures into 2,500,000 shares of common stock.

Note F - Events Subsequent to September 30, 2006
 
On October 11, 2006, Cornell converted $5,000 of convertible debentures into 3,125,000 shares of common stock.

On November 4, 2006, Cornell converted $2,500 of convertible debentures into $3,125,000 shares of common stock.

On December 21, 2006 Cornell and the Company entered into an agreement providing for the Company’s issuance of a secured convertible debenture to Cornell in the face amount of $7,642 for a purchase price of $7,642. The conversion price per share, subject to adjustment, is the lesser of (a) $0.0018 or (b) 80% of the lowest Closing Bid Price (as defined in the debenture) of the Company’s common stock for the five trading days immediately preceding the Conversion Date (as defined in the debenture).
 
 
Forward-Looking Statements and Associated Risks. This Report contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience, and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur as projected.
 
Description of Our Business
 
The Company was incorporated in Colorado on September 16, 1987 as Premium Enterprises, Inc. (“Premium”) On December 20, 2002, Premium entered into a Plan and Agreement of Reorganization with eTotalSource, Inc., a California corporation (the “Company” or “eTotalSource”) and its shareholders whereby Premium acquired 91% of the issued and outstanding common stock of eTotalSource in exchange for 15,540,001 shares of common stock of Premium. The contract was completed December 31, 2002. On June 17, 2003, shareholders voted to amend the Articles to change the name of Premium Enterprises, Inc. to eTotalSource, Inc.
 
History.
 
For a period of time in 1988-1994, Premium operated three fast lube locations, at various times in Arizona and Colorado as “Grease Monkey” franchises. The locations were unprofitable, two were sold, and the last franchise closed in 1994.
 
Premium then attempted to enter the automobile and truck tire recycling business in 1994. It formed a limited partnership, of which it owned 62.5%, and commenced limited tire recycling operations. The equipment proved to be inadequate and Premium ran out of capital and ceased all operations in 1996. Premium wrote-off all of its investment in equipment and licenses for tire recycling in 1996 and became dormant.
 
Business.
 
The sole business of the Company is that of eTotalSource.
 
General.
 
The Company is a developer and supplier of proprietary multimedia software technology, and a publisher of multimedia training content. The Company's clients work with eTotalSource to develop, produce, market, and distribute multimedia development software. eTotalSource is also marketing educational training programs it has produced utilizing its proprietary software.
 
eTotalSource was founded in February 2000 with the express goal of designing a better interface for information and education multimedia delivery. Approximately one year after inception, the beta Presenta ProTM platform was completed. Presenta ProTM features back-end development of multi-panel time synchronized presentations and course work, as well as testing, feedback and performance monitoring. Clients are utilizing Presenta ProTM as a platform for distance learning and computer-based training. Presenta ProTM is delivered via the

Internet, intranet, or CD/DVD ROM. Presenta ProTM simplifies the production and delivery of multimedia presentations and content while at the same time improving the quality and effectiveness of the presentations. Presenta ProTM is designed with cost saving features and it offers post-production opportunities.
 
Presenta ProTM features include:
 
o Multi-panel time synchronized presentation;
o Quick content and program development;
o Rich video and content experience;
o Still images;
o Graphics;
o Flash;
o Links to Website;
o Live Cams;
o Test and quizzes to tract performance;
o Users progress can be tracked;
o Diagrams;
o Simple server requirements;
o Reduces training and learning curve time; and
o Easy to implement and use.
 
Business Model.
 
STRATEGY: The Company employs a dual strategy to meet market demands and opportunities that includes both software licensing and publishing.
 
SOFTWARE LICENSING: The Company is licensing Presenta ProTM software via distribution partners and an internal sales and marketing team. The marketing team will be directing its sales effort in targeting the education, corporate and government markets. The cost of the product ranges from $5,500 to $15,000, and the Company is attempting to position the software package for sales in a volume intensive market in Q4 2006 or Q1 2007. The nearest competitor (in quality or functionality), Virage, prices its product at substantially higher prices. The Company believes that its aggressive pricing policy appeals to governments, schools and corporate clients.
 
PUBLISHING: The Company publishes and produces original content and postproduction services, and participates in the sales and distribution of the final published product.
 
eTotalSource shares in the revenue derived from program sales. The Company carefully chooses its content, identifying unique subjects and niches offering more probable sales. The Company believes that these topics/markets are generally underserved and in need of the program packages that are produced by eTotalSource. Examples of finished products currently being marketed include:
 
o Anger Management Facilitator Training and Certification;
o Domestic Violence Facilitator Training and Certification;
o School Maintenance, Cleaning Training and Certification;
o Emergency Disaster Preparedness - Terrorist Awareness; and
o Mandated School Internet Acceptable Use Policy.
 
Management believes that the production, postproduction and publishing also create an avenue for added revenues and potential profits. For example, if a client provides each of its employees finished packages of one topic area, produced and distributed by eTotalSource, then the Company would realize an additional profit over and above the production and post production profits as each individual package could be sold at $20.00 per unit and costs approximately $5.00 per unit to reproduce and ship.
 
Intellectual Property Differentiation.
 
eTotalSource’ technological differentiation is based on high quality and low cost software. We believe that Presenta ProTM is easier to use and considerably more flexible than eTotalSource’s closest competitor. We believe

that Presenta ProTM is priced to be affordable, cost-effective, and training-efficient. Presenta Pro’sTM ease of implementation and quality it a viable choice for authoring software and distance learning tools.
 
Technology.
 
The Presenta ProTM, production and delivery system is modular and was designed to allow rapid addition of functionality. The platform provides high quality streaming of video and audio, and was designed for delivery over the Internet, intranet, compact disk (“CD”) or digital video disk (“DVD”). The Presenta ProTM system has been created using the Delphi development system. The server portion of Presenta ProTM is a custom control that connects to a Microsoft SQL server. The data is distributed to the viewing client via a custom control that connects to the server via Extensible Markup Language (“XML”). The backend is scalable and transportable. The production client uses all custom code written in Delphi connecting to the SQL server via Transmission Control Protocol/Internet Protocol (“TCP/IP”). The end-user client can be run on any Windows based personal computer and requires minimum system resources. There are several modules to the end-user client that allow the producer to export video to either a CD/DVD format or stand alone website. We believe that eTotalSource’ technology and user interface are advanced in their simplicity of use and ability to deliver multiple platforms and media simultaneously.
 
eTotalSource has no plans for any research and development in the next 12 months.
 
 
Employees.
 
As of September 30, 2006, we had two full-time employees, both of which were executive personnel. No employees are presently represented by any labor unions. We believe our relations with our employees to be good. Additional employees are needed to meet our growth projections. eTotalSource has no expectation or anticipation of significant changes in number of employees in the next 12 months. It may add full-or part-time employees of an unknown number in the next 12 months if its business expands.
 
Going Concern

There is substantial doubt about the ability of eTotalSource to continue as a going concern as disclosed in the notes to the December 31, 2005 financial statements filed by eTotalSource on Form 10-KSB. Those conditions worsened through the third quarter of 2006 resulting in operating losses and liquidity shortages, including default conditions on certain notes payable and judgments payable to creditors. As of September 30, 2006, current liabilities exceed current assets by approximately $3 million.
 
Management continues to meet operating deficits primarily through short-term borrowings and is attempting to utilize other debt and non-dilutive equity financing alternatives to sustain operations. Whether such financing will be available as needed and the ultimate form of such financing is uncertain and the effects of this uncertainty could ultimately lead to bankruptcy.
 

Risk Factors
 
 
eTotalSource Lost Money For The Years Ended December 31, 2005 and 2004, And The Nine Months Ended September 30, 2006, And Losses May Continue In The Future
 
For the 12 months ended December 31, 2005 and 2004, we incurred a net loss of $1,284,661 and $2,372,675, respectively. For the nine months ended September 30, 2006, we incurred a net loss of $637,128, and for the three months ended September 30, 2006, we incurred a net loss of $196,123. We anticipate that we will in all likelihood have to rely on external financing for all of our capital requirements. Future losses are likely to continue unless we successfully implement our business plan. Our ability to continue as a going concern will be dependent upon our ability to issue other debentures as described in detail below under the section of this report

entitled “Liquidity & Capital Resources” or borrow from other unrelated parties. If we incur any problems in any of these scenarios, we may experience significant liquidity and cash flow problems. If we are not successful in reaching and maintaining profitable operations, we may not be able to attract sufficient capital to continue our operations. Our inability to obtain adequate financing will result in the need to curtail business operations and will likely result in a lower stock price.
 
We May Not Be Able To Access Sufficient Funds When Needed
 
Currently, we are dependent upon external financing to fund our operations. Our financing needs are expected to be provided, in large part, by additional debentures, although we have no assurance that any third party would accept such debentures given our current financial condition. If such debentures are not accepted by third parties, we would likely curtail or discontinue entirely our operations.
 
We Have Negative Working Capital Which May Affect our Ability to Continue As A Going Concern
 
We had negative working capital of $2,723,061 and $2,497,528 at December 31, 2005 and December 31, 2004, respectively, negative working capital of $3,165,425 for the nine months ended September 30, 2006, and continue to need cash for operations. We have relied on significant external financing to fund our operations. As of September 30, 2006, we had $937 of cash on hand, total current assets were $6,412, and our total current liabilities were $3,171,837. We will need to raise additional capital to fund our anticipated operating expenses and future expansion. Among other things, external financing may be required to cover our operating costs. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources. If we are unable to secure additional financing or we cannot issue additional debentures, we believe that we have sufficient funds to continue operations for approximately one month. We estimate that we will require $2,000,000 to fund our anticipated operating expenses for the next 12 months. The sale of our common stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. Our inability to obtain adequate financing will result in the need to curtail business operations and you could lose your entire investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
We Need Additional Capital To Be Successful, Which Will Potentially Dilute The Value Of Our Shareholders’ Shares
 
We need substantial capital to execute our business plan. To finance our operations to date, we have relied on private offerings, exercises of warrants, and loans. As of September 30, 2006, we have issued an aggregate of 11,731,908 shares of common stock to finance our operations. We will issue up to an additional 234,088,500 shares if all of the outstanding debentures are converted and all options and warrants exercised. The terms on which we obtain additional financing, including the exercise of outstanding warrants, may dilute the existing shareholders’ investment, or otherwise adversely affect their position. It is also possible that we will be unable to obtain the additional funding we need as and when we need it. If we are unable to obtain additional funding as and when needed, we could be forced to curtail or cease our operations.
 
All Of Our Assets Are Securing Our Obligations To Cornell
 
Pursuant to the terms contained in that certain Security Agreement dated October 6, 2004, by and between eTotalSource and Cornell Capital Partner, LP (“Cornell”), all of our obligations under the related Securities Purchase Agreement, the related Secured Convertible Debenture, the related Investor Registration Rights Agreement, the related Irrevocable Transfer Agent Instructions, and the related Escrow Agreement are secured by all of our non-cash assets as of such date or thereafter acquired by us. Accordingly, if we are unable to satisfy any of our obligations under the foregoing agreements, our assets may be foreclosed upon and our business may be shut down.

Our Success Is Based On Increasing Demand For Our Products
 
We depend on the continued demand for our products and on favorable general economic conditions. We cannot assure you that our business strategy will be successful or that we will successfully address these risks or difficulties. If we should fail to adequately address any of these risks or difficulties, we could be forced to curtail or cease our business operations.
 
We Rely On Our Senior Management And Will Be Harmed If Any Or All Of Them Leave
 
Our success is dependent on the efforts, experience and relationships of Terry Eilers, our Chief Executive Officer and Chairman, and Michael Sullinger, our Chief Operating Officer and a director, and other essential staff. If either of these individuals become unable to continue in their role, our business or prospects could be adversely affected. Although we have entered into employment agreements with each of our executive officers, we cannot assure you that such individuals will continue in their present capacity for any particular period of time.
 
Fluctuations In Our Operating Results May Adversely Affect Our Stock Price And Purchasers Of Our Shares Of Common Stock May Lose All Or A Portion Of Their Investment
 
Historically, there has been volatility in the market price for our common stock. Our quarterly operating results, the number of shareholders desiring to sell their share, changes in general conditions in the economy, the financial markets or the healthcare industry, or other developments affecting us or our competitors, could cause the market price of our common stock to fluctuate substantially. We expect to experience significant fluctuations in our future quarterly operating results due to a variety of factors.
 
Accordingly, in one or more future quarters, our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be materially adversely affected. If the selling shareholders all elect to sell their shares of our common stock at the same time, the market price of our shares may decrease. It is possible that the selling shareholders will offer all of the shares for sale. Further, because it is possible that a significant number of shares could be sold at the same time, the sales, or the possibility thereof, may have a depressive effect on the market price of our common stock.
 
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate Significantly
 
Our common stock is currently traded on the Over-the-Counter Bulletin Board (the “OTCBB”) and Pink Sheets. Prior to this offering, there has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. This could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Our common stock is thinly traded compared to larger, more widely known companies in our industry. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets, could cause the price of our common stock to fluctuate substantially.
 
Our Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements
 
Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Penny stocks are stock:
 
 
·
with a price of less than $5.00 per share;
 
 
·
that are not traded on a “recognized” national exchange;

 
 
·
whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stock must still have a price of not less than $5.00 per share); or
 
 
·
stock in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000,000 for the last three years.
 
Broker-dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
 
Shareholders should be aware that, according to the United States Securities and Exchange Commission (the “SEC” or the “Commission”), the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired consequent investor losses. eTotalSource' management is aware of the abuses that have occurred historically in the penny stock market. Although eTotalSource does not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to eTotalSource' securities.
 
Sale Of Shares Eligible For Future Sale Could Adversely Affect The Market Price
 
All of the approximate 8,117,946 shares of common stock which are currently held, directly or indirectly, by management have been issued in reliance on private placement exemptions under the Securities Act of 1933, as amended (the “Securities Act”). Such shares will not be available for sale in the open market without separate registration except in reliance upon Rule 144 under the Securities Act. In general, under Rule 144 a person (or persons whose shares are aggregated), who has beneficially owned shares acquired in a non-public transaction, for at least one year, including persons who may be deemed affiliates of eTotalSource, as defined, would be entitled to sell within any 3-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock, or the average weekly reported trading volume during the four calendar weeks preceding such sale, provided that current public information is then available. If a substantial number of the shares owned by these stockholders were sold under Rule 144 or a registered offering, the market price of the common stock could be adversely affected.
 
eTotalSource' Competition is Better Capitalized and Has Greater Marketing Capabilities Which Could Adversely Affect eTotalSource' Ability to Compete in the Marketplace

eTotalSource is in competition with other services and products developed and marketed by much larger corporations, which are better capitalized and have far greater marketing capabilities than eTotalSource. eTotalSource expects to be at a disadvantage when competing with many firms that have substantially greater financial and management resources and capabilities than eTotalSource. As a result of these disadvantages, eTotalSource may not be able to effectively complete in the markets in which its products and services are sold, which would, in turn, affect its ability to continue to operate.

Critical Accounting Policies

Revenue Recognition
eTotalSource recognizes revenue in accordance with Statement of Position No. 97-2 “Software Revenue Recognition” issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (the “AICPA”). Revenues are recorded net of an allowance for estimated returns and collectibility at the time of billing.

Product revenue is derived primarily from the sale of self-produced training multimedia and related off-the-shelf software products. eTotalSource recognizes revenue from sales of these products at the time of shipment to customers. Service revenue is primarily derived from production of videos for others and is recognized upon customer acceptance.

Deferred revenue includes payments received for product licenses covering future periods and advances on service contracts that have not yet been fulfilled.

Significant estimates include evaluation of eTotalSource's income tax net operating loss carry-forwards and valuation of non-monetary transactions in connection with issuances of common stock and common stock warrants and options.
 
Results of Operations
 
Results of Operations For The Three Month Period Ended September 30, 2006 Compared To The Same Period Ended September 30, 2005
 
Revenues.
 

Revenues for the three months ended September 30, 2006 were $333 versus $12,852 for the corresponding 2005 period, a decrease of $12,519 or 97%. The decrease was attributable to fewer sales of eTotalSource’s CD training products.

Expenses.

Operating expenses for the three month period ended September 30, 2006 were $108,386 as compared to $438,782 for the comparable 2005 period, a decrease of $330,396 or 75%. The decrease was primarily due to a decrease in consulting expense, professional services and payroll expenses. Payroll expenses for the three month period ended September 30, 2006 were $55,782 as compared to $79,081 for the comparable period in 2005, a decrease of $23,299 or 29%.

Interest expense for the three month period ended September 30, 2006 was $89,340 as compared to $75,585 for the corresponding 2005 period, an increase of $13,755 or 18%. The increase in interest expense is the result of the amortization expense in 2006 of the fair value of warrants issued as incentives to lenders and the amortization of secured convertible debenture in 2006.

Gain (Loss) From Operations.

eTotalSource recognized a loss for the three month period ended September 30, 2006 in the amount of $196,293 or $0.01 per share, as compared with a loss of $279,495 or $0.01 per share for the corresponding period ended September 30, 2005. The decrease of $74,202 or $0.001 per share was attributable to the increase of interest, decrease of operating expenses and decrease of payroll expenses.

Results of Operations For The Nine Month Period Ended September 30, 2006 Compared To The Same Period Ended September 30, 2005
 
Revenues.
 
Revenues for the nine months ended September 30, 2006 were $25,980 versus $41,836 for the corresponding 2005 period, a decrease of $15,856 or 38%. The decrease was attributable to fewer sales of eTotalSource’s CD training products.

Expenses.

Operating expenses for the nine month period ended September 30, 2006 were $207,584 as compared to $727,254 for the comparable 2005 period, a decrease of $519,670 or 71%. The decrease was primarily due to a decrease in consulting expense, professional services and payroll expenses. Payroll expenses for the nine month period ended September 30, 2006 were $174,971 as compared to $276,323 for the comparable period in 2005, a decrease of $101,352 or 37%.

Interest expense for the nine month period ended September 30, 2006 was $311,140 as compared to $88,124 for the corresponding 2005 period, an increase of $123,016 or 65%. The increase in interest expense is the result of the amortization expense in 2006 of the fair value of warrants issued as incentives to lenders and the amortization of secured convertible debenture in 2006.

Gain (Loss) From Operations.

eTotalSource recognized a loss for the nine month period ended September 30, 2006 in the amount of $637,128 or $0.01 per share, as compared with a loss of $872,446 or $0.01 per share for the corresponding period ended September 30, 2005. The decrease of $235,318 or $0.003 per share was attributable to the increase of interest, decrease of operating expenses, decrease of payroll expenses and write-off of services and accrued payroll forfeited by an officer at the time of his resignation.

Contractual Obligations and Commercial Commitments

As of September 30, 2006, the following obligations were outstanding:

Payments Due Period
Contractual Obligations
  
Less than 1 year
  
2-3 years
  
4-5 years
  
After 5 years
  
Total
  
Judgments payable
  
$
204,788
  
$
.00
  
$
.00
  
$
.00
  
$
204,788
  
Short Term note payables
    
1,047,114
    
.00
    
.00
    
.00
    
1,047,114
  
Convertible debentures (net discounts - $195,709)
    
.00
    
739,291
    
.00
    
.00
    
739,291
  
Other current liabilities
    
1,919,935
    
.00
    
.00
    
.00
    
1,919,935
  
Total contractual cash obligations
  
$
3,171,837
  
$
739,291
  
$
.00
  
$
.00
  
$
3,171,837
  
 
Facilities and Leases
 
eTotalSource leases its corporate offices in Yuba City, California on a month-to-month basis with no expiration date. Monthly rentals under the lease are approximately $800. Such premises are adequate to serve eTotalSource’s current staffing level. The offices consist of approximately 500 square feet.
 
Dividends
 
eTotalSource does not intend to pay dividends in the foreseeable future.

Liquidity and Capital Resources

At September 30, 2006, eTotalSource had $937 in cash with which to conduct operations, an increase of $502 during the quarter. There can be no assurance that eTotalSource will be able to complete its business plan or fully exploit business opportunities that management may identify. Accordingly, eTotalSource will need to seek additional financing through loans, the sale and issuance of additional debt and/or equity securities, or other financing arrangements, including loans from our shareholders to cover expenses. eTotalSource presently has no capital availability. All of the funds available under the 2005 SEDA described below have been delivered to the Company. The 2005 SEDA is completed on behalf of Cornell and they continue to convert under the November 2005 Debentures and related warrants. 
 
eTotalSource is unable to carry out any plan of business without funding. We cannot predict to what extent our current lack of liquidity and capital resources will impair the continuation of business or whether it will incur further operating losses. There is no assurance that we can continue as a going concern without substantial funding, for which there is no source.
 
eTotalSource does not have capital sufficient to meet its current cash needs. We will have to seek loans or equity placements to cover such cash needs. Lack of its existing capital may be a sufficient impediment to prevent it

from accomplishing the goal of successfully executing its business plan. eTotalSource will need to approximately $2 million to fund its operations over the next 12 months. At the present, our current cash will last less than a month.
 
No commitments to provide additional funds have been made by management or other stockholders. Accordingly, there can be no assurance that any additional funds will be available to eTotalSource to allow it to cover its expenses as they may be incurred.
 
Irrespective of whether eTotalSource's cash assets prove to be inadequate to meet our operational needs, we might seek to compensate providers of services by issuances of stock in lieu of cash.
 
We estimate that we will require approximately $2 million to fund our operations for the next 12 months.
 
The November 2005 Debentures.
 
On November 2, 2005, the Company entered into a Securities Purchase Agreement with Cornell, pursuant to which we issued to Cornell secured convertible debentures in the principal amount of $1,000,000 (the “November 2005 Debentures”). Of this amount, $175,000 was previously funded on October 7, 2004, $175,000 was previously funded on December 2, 2004, $100,000 was previously funded on August 19, 2005, and $530,130 was funded on November 4, 2005. The November 2005 Debentures were issued to consolidate these prior debentures and to reflect additional funding to the Company in the amount of $530,130.

The November 2005 Debentures are secured by substantially all of the Company’s assets, has a three-year term and accrues interest at 12% per annum. Cornell is entitled, at its option, to convert, and sell all or any part of the principal amount of the November 2005 Debenture, plus accrued interest thereon, into shares of the Company’s common stock, at a price per share equal to the lesser of (a) an amount equal to an amount equal to 120% of the closing bid price of the common stock as listed on a principal market as quoted by Bloomberg L.P., on the date hereof or (b) an amount equal to 80% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date which may be adjusted pursuant to the other terms of the November 2005 Debenture. In the event the November 2005 Debentures are redeemed, then we will issue to Cornell a warrant to purchase 2,000,000 shares at an exercise price of $0.001 or as subsequently adjusted under the terms of the warrant.

The 2005 SEDA.

On April 20, 2005, we entered into a Standby Equity Distribution Agreement with Cornell (the “2005 SEDA”). Pursuant to the 2005 SEDA, we could have, at our discretion, periodically sold to Cornell shares of our common stock for a total purchase price of up to $10,000,000. For each share of common stock purchased under the 2005 SEDA, Cornell would have paid eTotalSource 98% of the lowest volume weighted average price of our common stock on the OTCBB or other principal market on which our common stock is traded for the five trading days immediately following the notice date. Further, Cornell would have retained a fee of 5% of each advance under the 2005 SEDA. In connection with the 2005 SEDA, Cornell received a one-time commitment fee in the form of 3,833,334 restricted shares of our common stock.
 
The 2005 SEDA, along with the related Investor Registration Rights Agreement, related Placement Agent Agreement, related Irrevocable Transfer Agent Instructions, and related Escrow Agreement, all of which were dated as of April 20, 2005, were terminated by eTotalSource and Cornell pursuant to that certain Termination Agreement date November 2, 2005, by and between Cornell and the Company.

2006 SB-2 - Registration Statement

On February 14, 2006, the Company’s registration statement on Form SB-2 was declared effective by the SEC. The Company registered the following shares in the SB-2: (i) 200,000,000 shares of common stock issued under the 2005 SEDA with Cornell; (ii) 31,250,000 shares of common stock underlying the 2005 Secured Convertible Debentures issued to Cornell; (iii) 3,833,334 shares of common stock issued to Cornell as a one-time commitment fee under the 2005 SEDA; (iv) 166,666 shares of common stock issued to Newbridge Securities Corporation, an unaffiliated registered broker-dealer retained by eTotalSource in connection with the 2005 SEDA, as a one-time placement agent fee; and (v) an aggregate of 9,340,000 shares of common stock previously issued in
 
various financing transactions between eTotalSource and certain third-parties. The Company will receive no proceeds from any sale of its shares of common stock under the registration statement on Form SB-2.
 
The December 2005 Debenture.

On December 21, 2006 Cornell and the Company entered into an agreement providing for the Company’s issuance of a secured convertible debenture (the “December 2006 Debenture”) to Cornell in the face amount of $7,642 for a purchase price of $7,642. The conversion price per share, subject to adjustment, is the lesser of (a) $0.0018 or (b) 80% of the lowest Closing Bid Price (as defined in the December 2006 Debenture) of the Company’s common stock for the five trading days immediately preceding the Conversion Date (as defined in the December 2006 Debenture). The proceeds from the December 2006 Debenture were used to pay professional fees relating to accounting work and securities law reporting and compliance.

 
a. Evaluation Of Disclosure Controls And Procedures
 
eTotalSource’s Principal Executive Officer and Principal Accounting Officer, after evaluating the effectiveness of eTotalSource’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report, have concluded that as of such date, eTotalSource disclosure controls and procedures were adequate and effective to ensure that material information relating to eTotalSource that is required to be disclosed by eTotalSource in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and accumulated and communicated to eTotalSource’ management, including its Principal Executive Officer and Principal Accounting and Financial Officer, to allow timely decisions regarding required disclosure.
 
b. Changes In Internal Controls Over Financial Reporting
 
In connection with the evaluation of eTotalSource’ internal controls during the Company’s last fiscal quarter, eTotalSource’ Principal Executive Officer and Principal Accounting Officer have determined that there are no changes to eTotalSource’ internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.
 
 
OTHER INFORMATION
 
 
 
None.
 
 
  None.
 
 
Notes Payable issued on January 4, 2002 to an unrelated trust in the amount of $40,000 (14% interest), $110,000 (18% interest), and $172,000 (15% interest), are all in default. As of September 30, 2006, $322,000 of principal and $45,150 of interest was outstanding on these notes.

Convertible Notes Payable issued on July 31, 2000 to unrelated parties in the total amount of $150,000 at 6% interest are in default. As of September 30, 2006, $150,000 of principal and $51,951 of interest was outstanding on this note.

Note Payable issued on December 3, 2001 to an unrelated party in the amount of $100,000 at 8% interest is in default. As of September 30, 2006, $100,000 of principal and $21,228 of interest was outstanding on this note.

Notes Payable issued on April 15, 2003 and August 3, 2003 to an unrelated trust in the amount of $52,483 and $262,631 at 10% interest are in default. As of September 30, 2006, $315,114 of principal and $15,799 of interest was outstanding on this note.

A note payable issued on January 4, 2002 to a director in the amount of $10,000 at 9.2% is in default. As of September 30, 2006, $10,000 of principal and $6,133 of interest was outstanding on this note.

Notes Payable issued on April 20, 2005 and June 27, 2005, respectively, to an unrelated party, due August 1, 2005, in the amount of $100,000 at 10%, and $25,000 at 12%, are in default. As of June 30, 2006, $125,000 of principal and $20,510 of interest was outstanding on these notes.

Note Payable issued on April 15, 2006 to an unrelated party in the amount of $25,000 at 12% interest is in default. As of September 30, 2006, $25,000 of principal and $500 of interest was outstanding on this note.

 
None.

 
None.
 
 
 
a.
Exhibits pursuant to Regulation S-K:
 
DESIGNATION OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION S-B
  
DESCRIPTION
  
LOCATION
       
3.1   Articles of Incorporation   Incorporated by Reference to the Registration Statement of Form SB-2 filed on April 21, 2005.
         
3.2   Bylaws   Incorporated by Reference to the Registration Statement of Form SB-2 filed on April 21, 2005.
         
3.3
  
Certificate of Amendment of the Articles of Incorporation
  
Incorporated by reference to the current report on Form 8-K dated July 14, 2003. (File no. 000-49797)
         
3.4
  
Articles of Amendment to the Articles of Incorporation
  
Incorporated by reference to the current report on Form 8-K dated December 1, 2003 (File no. 000-49797)
         
4.1
  
2003 Stock Plan
  
Incorporated by reference to the current report on Form S-8 dated May 23, 2003. (File no. 333-105518)
         
4.11
  
2004 Stock Plan
  
Incorporated by reference to the current report on Form S-8 dated July 15, 2004. (File no. 333-111732)
         
10.1
  
Plan & Agreement of Reorganization dated December 18, 2002 by and between Premium Enterprises, Inc and eTotalSource, Inc.
  
Incorporated by reference to the Annual Report on Form 8-K dated December 30, 2002. (File no. 000-49797)
         
10.2
  
Employment Agreement of Terry Eilers dated February 7, 2000
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.3
  
Employment Agreement of Virgil Baker dated February 7, 2000
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
 
 
DESIGNATION OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION S-B
  
DESCRIPTION
  
LOCATION
       
10.4
  
Employment Agreement of Michael Sullinger dated August 1, 2002
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.5
  
Securities Purchase Agreement, dated October 6, 2004 by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.6
  
Investor Registration Rights Agreement, dated October 6, 2004, by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.7
  
Security Agreement, dated October 6, 2004, by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.
 
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.8
  
Irrevocable Transfer Agent Instructions, dated October 6, 2004, by and among eTotalSource, Inc., Cornell Capital Partners, L.P., and Executive Registrar & Transfer, Inc.
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.9
  
Escrow Agreement (SEDA), dated October 6, 2004, by and among eTotalSource, Inc., Cornell Capital Partners, L.P., and David Gonzalez, Esq.
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
         
10.10
  
Termination Agreement, dated November 2, 2005, by and among eTotalSource, Inc. and Cornell Capital Partners, L.P.
  
Incorporated by reference to the Current Report on Form 8-K dated November 8, 2005.
         
 
Agreement dated December 21, 2006 by and between eTotalSource, Inc. and Cornell Capital Partners, L.P.
 
         
 
Secured Convertible Debenture dated December 21, 2006 in the Principal Amount of $7,642 issued by eTotalSource, Inc. to Cornell Capital Partners, L.P.
  
         
14.1
  
Code of Ethics
  
Incorporated by reference to the pending Registration Statement on Form SB-2 dated November 24, 2004 (File no. 333-120786)
 
 
DESIGNATION OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION S-B
  
DESCRIPTION
  
LOCATION
       
15.1
  
Letter on Change in Certifying Accountants
  
Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
         
16.1
  
Letter on Departure of Director -Virgil Baker
  
Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
         
16.2
  
Letter on Departure of Director - John (Cody) Morrow
  
Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 30, 2006
         
 
Certification of Chief Executive Officer and Interim Chief Financial Officer (one person) pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
  
         
 
Certification of Chief Executive Officer and Interim Chief Financial Officer (one person) pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
 
b.  Reports on Form 8-K:

On August 30, 2006, the Company filed a Current Report on Form 8-K to disclose: (i) a change in the Company’s certifying accountants, (ii) the resignation of Virgil Baker as Chief Financial Officer and a director of the Company, and (iii) the resignation of John (Cody) Morrow as a director of the Company. All of the foregoing events occurred on May 15, 2006.
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
eTotalSource, INC.
   
   
   
December 21, 2006
By: /s/ Terry L. Eilers   
 
Terry L. Eilers, President,
Chief Executive Officer, Interim Chief Financial Officer and Director
   
 
 
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